S&P lowers amerenenergy generating co. rating to 'b'

Mon Nov 26, 2012 12:23pm EST

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Nov 26 - Overview
     -- The rating on Ameren Energy Generating Co. (GenCo) reflects its 
stand-alone credit quality given our assessment that parental support for 
GenCo is minimal.
     -- We are lowering our corporate credit rating on GenCo to 'B' from 
'BB-'. The outlook is stable.
     -- We are lowering our rating on GenCo's senior unsecured debt to 'B+' 
from 'BB-', reflecting our expectation of substantial (70%-90%) recovery in 
the event of a payment default.
     -- The stable outlook incorporates our expectation that Genco's profit 
margins will remain pressured because of low electricity market prices and the 
expiration of a higher hedged position.

Rating Action
On Nov. 26, 2012, Standard & Poor's Ratings Services lowered its corporate 
credit on Ameren Energy Generating Co. to 'B' from 'BB-'. We also lowered the 
ratings on GenCo's senior unsecured debt to 'B+' from 'BB-'. The outlook is 
stable. The recovery rating on GenCo's senior unsecured debt has been revised 
to '2' from '3', indicating our expectation of substantial (70%-90%) recovery 
in the event of a payment default. The revised recovery rating reflects our 
previous capping of GenCo's recovery ratings at '3', which is typically the 
limit for unsecured debt of companies with a corporate credit rating of 'BB-' 
or higher, because we believe there is a high probability that the recovery 
prospects on this debt will be impaired by additional priority or pari passu 
debt or other claims before a default.

Rationale
The downgrade on Ameren Energy Generating Co. reflects its stand-alone credit 
quality, including its highly leveraged financial risk profile and weak 
business risk profile. Our view of GenCo is based on its standalone credit 
quality and reflects our assessment of no material support for GenCo by parent 
Ameren. It is our opinion that Ameren would only provide support to GenCo to 
the extent that Ameren anticipates an improving forward power price curve by 
2018, when its $300 million senior unsecured note matures and incremental 
environmental capital investments are needed to meet the state's 
multipollutant standards.

GenCo's highly leveraged financial risk profile reflects Standard & Poor's 
base-case scenario that cash flow measures will weaken over the next three 
years. We expect funds from operations (FFO) to debt to gradually weaken to 
less than 10% and for debt to EBITDA to increase to more than 6x, reflecting 
cash flow measures that are consistent with the highly leveraged financial 
risk profile category. For the 12 months ended June 30, 2012, FFO to debt 
decreased to 19.3% compared with 24.2% at year-end 2011, adjusted debt to 
EBITDA weakened to 4.2x compared with 3.4x at year-end 2011, and adjusted debt 
to total capital remained unchanged at 48.5%. Under Standard & Poor's 
base-case scenario, we expect that over the next three years the U.S. economy 
will continue to grow slowly at an annual GDP growth rate of about 2.5%. Under 
this scenario, electricity demand growth by itself would be insufficient to 
substantially increase the market price of electricity.

While GenCo has materially reduced capital spending over the next three years, 
partially by decelerating spending on the Newton scrubber project, we expect 
that GenCo's discretionary cash flow will eventually turn negative as 
higher-priced electricity hedges expire. To meet its cash obligations, 
management will have to continue to identify further opportunities to reduce 
costs, use its available cash, and potentially sell assets.

GenCo's weak business risk profile reflects its ultimate dependence on the 
market price of electricity, which has remained low. Management has 
proactively addressed those areas that it can directly influence, including 
maintaining a consistent hedging program, reducing costs and capital spending, 
receiving a variance from the Illinois Pollution Control Board to extend the 
state's compliance date for the multipollutant standards, and solidifying 
GenCo's liquidity by entering into a minimum $100 million asset put option 
with Ameren. However, while GenCo's three-year rolling hedging strategy 
provided a degree of price insulation over the past two years, sustained low 
power prices have undermined this credit enhancement. Over the next year, we 
expect that expiring higher-priced hedges will continue to be replaced by 
lower market prices. While we expect that management may continue to identify 
further cost reduction opportunities, the business risk profile will continue 
to be pressured by the company's less efficient coal plants and its Midwest 
location, which lacks a robust capacity market and higher congestion pricing.

Liquidity
GenCo has "strong" liquidity and can more than cover its needs for the 
short-term, even if EBITDA decreases. Our liquidity assessment is based on the 
following factors and assumptions:

     -- We expect the company's liquidity sources (including cash, FFO, and 
potential asset sales) over the next 12 months to exceed its uses by more than 
2.5x.
     -- GenCo does not have long-term debt maturities until 2018.
     -- Even if EBITDA decreases by 30%, we believe net sources will be in 
excess of liquidity requirements.
     -- The company has sound relationships with its banks and has generally 
prudent risk management, including its flexibility to lower capital spending 
and ability to exercise its $100 million asset put option.

In our analysis, we assumed liquidity of more than $200 million over the next 
12 months, primarily consisting of cash, FFO, and potential asset sales. We 
estimate the company will use about $80 million over the same period for 
capital spending and working capital needs.

GenCo terminated its $500 million credit facility in November 2012. GenCo's 
bond indenture includes financial covenants that must be met for GenCo to 
incur additional indebtedness. These financial covenants include a 
debt-to-capital ratio of no greater than 60% and a minimum interest coverage 
ratio of 2.5x. Because of these financial covenants, GenCo projects that it 
will not be able to borrow additional funds from external third parties as of 
March 31, 2013. Therefore, our assessment of GenCo's strong liquidity does not 
rely on external third party borrowings.

Recovery analysis
GenCo's unsecured notes are rated 'B+', one notch higher than the corporate 
credit rating. The '2' recovery rating indicates our expectation of 
substantial (70%-90%) recovery. We will publish a full recovery report on 
RatingsDirect following the release of this report.

Outlook
The stable outlook incorporates Standard & Poor's base-case scenario for GenCo 
as a standalone company that assumes that profit margins will continue to be 
pressured by low electricity market prices and the expiration of higher-priced 
hedges. Under our base-case scenario, the company's financial measures will 
weaken so that FFO to debt will be less than 10% and debt to EBITDA will be 
more than 6x. We could lower the ratings if our assessment of the company's 
strong liquidity weakens to less than adequate or if FFO to debt is 
consistently less than 5%. The ratings could be raised if the U.S. economy 
improves, increasing the demand and the price of electricity so that FFO to 
debt is consistently greater than 12%.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings On Global Industrials 
Issuers' Speculative-Grade Debt, Aug. 10, 2009 
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- Standard & Poor's Extends Recovery Ratings To Unsecured 
Speculative-Grade Corporate Issues, March 21, 2008

Ratings List

Downgraded; Outlook Action
                                        To                 From
AmerenEnergy Generating Co.
 Corporate Credit Rating                B/Stable/--        BB-/Negative/--

Ratings Revised
                                        To                 From
AmerenEnergy Generating Co.
 Senior Unsecured                       B+                 BB-
  Recovery Rating                       2                  3
Ratings Affirmed

Ameren Corp.
Ameren Missouri
Ameren Illinois Co.
 Corporate Credit Rating                BBB-/Stable/A-3

Ameren Corp.
 Senior Unsecured                       BB+
Commercial Paper                        A-3

Ameren Illinois Co.
 Senior Secured                         BBB+
  Recovery Rating                       1+
 Senior Secured                         BBB
  Recovery Rating                       1
 Preferred Stock                        BB
 Commercial Paper                       A-3

Ameren Missouri
 Senior Secured                         BBB+
  Recovery Rating                       1+
 Preferred Stock                        BB
 Commercial Paper                       A-3

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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